Ten years down the line, 2016 may well be seen as the year in which Indian banking changed dramatically. This is because the landscape and competitive scenario have totally changed, and only the fittest will survive. “Fittest” is not a term one would use to describe any of the public sector banks, which are still busy looking inward at their red ink-soaked balance-sheets, and looking towards heaven for capital. But for survival they have to look out of the window at the competition, and the sight is not pretty.
Some of the big changes now underway are the following:
#1: By the end of the year, payment banks will begin operations, chipping away at the low-cost deposit bases of banks, especially stodgy nationalised banks.
#2: Around the same time, small banks, which have to lend at least 50 percent of their advances to borrowers below Rs 25 lakh, will also be in action. They will eat into the SME loan portfolios of banks.
#3: Wholesale banks will take another 18-24 months to take shape (even guidelines are not out as yet), but when they start ops, they will bite into the bulk loan and infrastructure books of banks. Saddled with many bad loans, banks may not worry about this much for now, but if infrastructure revives, as it surely will, they may lose one more area of growth. In budget 2014-15, Arun Jaitley had exempted infrastructure bonds of tenures above seven years from cash reserve ratio (CRR) and statutory liquidity ratio (CRR). Though not much has been raised through this window yet, once demand picks up, the bonds will also start flying. Wholesale banks could be the ones to ignite this market.
#4: With the launch of the unique payments interface (UPI) app by the Reserve Bank Governor a few days ago, it is certain that bank transactions will steadily be mobile and smartphone-based. Banks which are not smart and technology savvy will thus find themselves being edged out by the competition, especially mobile phone companies and aggressive private banks like HDFC, ICICI, Kotak and Axis, not to speak of the many foreign banks.
Net-net, Indian banking is at a new inflexion point, and if all existing players do not ask themselves how they are going to compete in this changing scenario, they will fall by the wayside. Even private players cannot consider themselves exempt from extinction.
The following are the questions promoters should be asking themselves.
First, the government. As the promoter of public sector banks, the government has no time to waste. If it does not give banks financial autonomy, recapitalise them fast, and also lay out the roadmap for future privatisation, these banks will become tomorrow’s Air India and BSNL. The new competitive scenario makes privatisation not only another option, but a necessity.
Second, nimble private banks. Payment banks are going to chip away at their cheap deposit bases, and also nibble at their customers. They will be asset light, with very small investments in brick-and-mortar branches. An Airtel Bank will have a catchment area of 245 million captive mobile customers to sell its payment banking services to. Not all will opt for this, but one can bet that a large chunk of customers will move some of their money to Airtel, and some of it will come from HDFC, ICICI, Yes Bank and Axis Bank. In short, the SA part of CASA - current account, savings account – will be up for grabs.
Third, pressure on yields. If payment banks are successful, and since they can only invest in government paper up to a year’s tenure, there will be downward pressure on short-term yields. This will impact all banks, as their investment incomes will be under pressure. This will also impact returns for liquid and other mutual funds.
Fourth, the newbies should worry. The promoters of Bandhan Bank and IDFC Bank, who got banking licences last year, will also have to ask themselves whether they are better off being universal banks opt for differentiated licences. Bandhan Bank, which was actually serving customers with small ticket loans, will see its costs rise as it tries to access deposits in urban areas and service its large capital. If it had got into the banking game as a small bank instead of a universal bank, it could have operated on a lower capital base with lower overheads. Now both will go up. Is it worth serving small borrowers as a universal bank with high overheads or as a small bank?
Ditto for IDFC, which became a bank after being a focused infrastructure lender. As a universal bank, it is tough to see why anyone should start an account here, when we already have many good private banks already established. Banking is a sticky business, and few people switch banks or add new accounts unless they have a strong reason to. IDFC will not find it easy to get into the CASA game. Meanwhile, its old business looks set to revive. Infrastructure is the sector that is likely to boom in a couple of years: with the UDAY scheme, the power sector is on the mend; under Nitin Gadkari and Suresh Prabhu, big investments are being made in roads and railways. Smart cities will demand more infrastructure investment. And with the opening up of wholesale banking and the elimination of SLR/CRR for infrastructure bonds of tenures beyond seven years, IDFC’s board should be asking itself a basic question: is it worth becoming an undifferentiated universal bank, when we can be a differentiated wholesale and infrastructure bank?
Fifth, successful NBFCs also need to rethink their plans. For example, it was earlier assumed that HDFC (the housing finance pioneer) and HDFC Bank could merge once CRR/SLR requirements were relaxed. But HDFC’s options have improved with the arrival of differentiated banking. It should be easier for HDFC to float a wholesale bank and raise long-term loans. It could become a wholesale housing loan major itself and retain the home loans on its own books instead of offloading them to HDFC Bank for a fee. As at the end of December 2015, HDFC has sold or reassigned nearly Rs 29,000 crore worth of loans. HDFC could also diversify into infrastructure lending if it can raise more long-term resources than what it can use. In this event, it could offload its retail portfolio to the bank and refocus.
In short, 2016 has changed the game for everybody. Only the most innovative and aggressive players will be around 10 years from now.